Rising rates will boost Saudi Arabia’s banking sector but should not hurt the kingdom’s forthcoming bond issuance programme, analysts said.
The Saudi Arabian monetary agency on Thursday lifted its reserve repurchase rate to 0.5 per cent, up from 0.25 per cent, in line with the Federal Reserve’s interest rate rise on Wednesday night.
That is good news for Saudi banks, where deposit growth has slowed.
“In the short term, this is positive for Saudi banks – especially for banks with large books of floating-rate, corporate loans,” said Suha Urgan, a banking analyst at Standard and Poor’s.
Saudi banks typically have large volumes of customer deposits, most of which do not pay interest. That means that Saudi banks will be able to charge corporate borrowers more, while not having to pay higher interest to savers, Mr Urgan said. However, higher rates and the lower oil price will increase the cost of funding for Saudi banks.
“We have seen liquidity shrinking in the Gulf. There is weakness in government deposits, and new Saudi sovereign issues will absorb excess liquidity in the banking system – both of which mean that the cost of funding will increase,” Mr Urgan said.
The low oil price means that non-performing loans are set to increase. “There will be a gradually diminishing benefit from higher rates … because the low oil price environment means that credit losses will increase, which will affect the profitability of the Saudi banking system,” Mr Urgan said.
But the higher interest rate environment is unlikely to raise the cost of sovereign debt issuance for Saudi Arabia, which has a mammoth 21 per cent budget deficit to plug this year, and is set to tap international debt markets to do so.
“Most of the Fed hiking seems to be already priced into US Treasuries, which are the basis for working out how much Saudi Arabia will pay to issue debt,” said William Jackson, an emerging-markets economist at Capital Economics. “Unless the Federal Reserve surprises by raising rates more aggressively than expected, borrowing costs for Saudi Arabia shouldn’t rise very sharply.”
The wider economic effects of higher rates were likely to be limited, Mr Jackson said.
“Tighter policy in the US is not the biggest factor affecting the Gulf economies – that’s the oil price decline, which means we’re going to see fiscal tightening,” he said. “Nevertheless, monetary tightening is unhelpful, and adds to predictions that growth is going to slow in 2016.”